News Tone, Investor Sentiment, and Liquidity Premium

41 Pages Posted: 24 May 2021 Last revised: 19 Aug 2022

See all articles by Jun Liu

Jun Liu

Tilburg University - TIAS School for Business and Society

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Ming Zhou

Central University of Finance and Economics (CUFE)

Date Written: August 17, 2021

Abstract

Investor sentiment affects stock market liquidity by affecting noise trading and irrational market makers. Previous studies have focused on this effect with the time-series variation in sentiment and liquidity. This paper utilizes firm-specific news sentiment (FSNS) to examine its effect on stock liquidity in China stock market and show that firms with an optimistic tone cause a rise in trading activity while decreasing price impact and transaction cost. We also find that pessimistic stocks exhibit a stronger predictive effect on stock returns than optimistic stocks. After decomposing liquidity into non-sentiment-driven components, we find that the liquidity premium is declining but remains significant. This declining pattern indicates that FSNS contributes to explaining the liquidity premium. We also show that monetary policy uncertainty, growth of margin trading, and institutional ownership are the underlying mechanisms driving the predictability of stock liquidity.

Keywords: investor sentiment, liquidity, liquidity premium

JEL Classification: G12, G14, G32

Suggested Citation

Liu, Jun and Wu, Kai and Zhou, Ming, News Tone, Investor Sentiment, and Liquidity Premium (August 17, 2021). Available at SSRN: https://ssrn.com/abstract=3851089 or http://dx.doi.org/10.2139/ssrn.3851089

Jun Liu

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Ming Zhou

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
87
Abstract Views
420
rank
401,360
PlumX Metrics